Photo of Rami PandherBy Rami PandherMay 04 2017
Tax Law

Income Tax Objections - Dealing with the CRA

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Introduction

After the completion of an audit and receiving either a Notice of Assessment or Notice of Reassessment (the “(re)assessment”) from the Canada Revenue Agency (“CRA”), taxpayers facing an income tax liability embark on an arduous path in resolving their tax dispute. Last year’s report by the Office of the Audit General of Canada (the “Report”) made clear that taxpayers are spending more time waiting on the CRA than having their disputes resolved.

Taxpayers can object to the (re)assessment by filing a Notice of Objection (“Objection”) within 90 days of the (re)assessment. In limited circumstances, the CRA (or the Tax Court of Canada) may grant an extension of time to file an Objection (but such a request must be made within one year after the 90-day objection period has expired). The CRA will then vacate, confirm, or vary the underlying (re)assessment. This is where the fun begins:

Office of the Auditor General Report

The objective of the Report was to determine whether the CRA was efficiently managing the income tax objections and appeals process. The audit, covering April 1, 2011 to March 31, 2016, the Report made the following findings:

  • inefficiencies in the CRAs process caused delays in resolving objections in a timely manner;
  • the CRAs way of measuring timeliness was neither consistent nor complete and did not provide an accurate measure of the time it took to process an objection;
  • approximately 65% of decisions about objections were fully or partially in favour of the taxpayers; and
  • the CRA did not adequately share information and the results of decisions, which limited its ability to improve its performance.

Tax Dispute Resolution Process

Given the findings of the Report, the following tips can help taxpayers navigate this complex process:

  • Deducting Tax Lawyer Fees – Legal and accounting fees incurred to contest an audit or assessment are deductible.
  • Interest – Non-deductible interest on tax payable starts accruing at the CRA’s prescribed rate (1%)[1] and is compounded daily. Given that it can take months, or even years, to resolve a dispute with the CRA, there is a high opportunity cost to waiting. If possible, taxpayers should pay the full amount in dispute.[2] If the taxpayer is ultimately successful, this amount will be refunded with interest.
  • Tax Court – If cash flow is an issue, or the taxpayer just wants to expedite the process, the taxpayer can file a Notice of Appeal to escalate the matter to the Tax Court of Canada.
  • Limitation Periods – Generally, the CRA can reassess a taxpayer for up to three years (or four years in the case of a mutual fund trust or a non-Canadian-controlled private corporation).[3]
  • Extended limitation period – The CRA can, however, extend the limitation period indefinitely where it can be established that the taxpayer has (i) made a misrepresentation due to negligence, carelessness, or wilful default, or (ii) committed any fraud in filing a return or in supplying any information to the CRA.
  • Taxpayers in a loss position should ask for a notice of determination as taxpayers cannot object to a “nil” assessment. This will also start the clock on any limitation periods.
  • The restrictive “Large Corporation Rules” have a material impact on the way an Objection is drafted.[4] Corporations involved in complex and lengthy audits will have limited ability to alter the basis of its appeal at the Tax Court level, if necessary, after filing the Objection.[5]
  • Cross-border disputes that result in double taxation can be resolved through the Mutual Agreement Procedure article found in most of Canada’s tax treaties (“MAP”). This allows the tax authorities of the respective countries to resolve the double taxation.

Conclusion

It is clear that the CRA has failed to meet its statutory duty to review Objections with “all due dispatch”. The result is a costly, in terms of time and interest, frustrating and complex process for taxpayers to navigate.[6] Hopefully, the process will be streamlined as a result of the Report.

Invitation for Discussion:

If you would like to discuss this article in greater detail, or any other tax or business law matter, please do not hesitate to contact one of the lawyers in the tax law group at Nerland Lindsey LLP.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

[1] For more information on the prescribed rate of interest, see our previous article entitled "CRA’s Prescribed Interest Rate Expected to Rise in Q4"

[2] Corporations are required to pay one half of the (re)assessed amount.

[3] This limitation period is extended three years for matters involving non-residents.

[4] A “large corporation” within the meaning of subsection 225.1(8) is a corporation with a taxable capital greater than $10 million.

[5] See, for example, Devon Canada Corporation v. Canada, 2015 FCA 214.

[6] For an extreme example of what could happen, see: Leroux v Canada Revenue Agency, 2014 BCSC 720; aff’d. 2014 BCCA 355.

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